Dubai: Non-resident Indians (NRIs) can now earn more from their deposits in certain non-resident Indian bank accounts. This was after India’s central bank removed the cap on the amount of interest rates that could be increased for NRI bank deposits. But what does this mean for NRIs and how will it increase NRI savings?
The Reserve Bank of India (RBI) has recently lifted the interest rate cap on Foreign Currency Deposits of Non-Resident Banks (FCNR) and Non-Resident External Accounts (NRE) for the period 7 July to 31 October, and this was followed by banks raising rates on NRI deposits at several banks.
Difference between FCNR and NRE bank accounts
The FCNR is an account that allows NRIs to deposit their foreign income in Indian banks in the currency of their country of residence and earn interest on it. FCNR deposits can be made in currencies such as US Dollar, British Pound, Euro, Yen, Australian Dollar, Singapore Dollar, and Canadian Dollar, among others.
On the other hand, an NRE account is a bank account opened in India in the name of an NRI, to park his foreign earnings. In an NRE deposit, the currency deposited from abroad is converted into rupees.
Indian residents can also open and maintain these deposits as joint holders with an NRI relative, but since the money must come from outside India, Indian joint account holders cannot make deposits. Money from both types of deposits is repatriable or transferable.
What does the recent rule change mean for NRIs?
As per RBI guidelines, banks can offer up to 2.5% and 3.5% for FCNR deposits with a maturity of one year to less than one year, and three years and up to five years, respectively.
For NRE deposits, interest rates cannot be higher than the rates offered by banks on comparable term deposits in the country.
The RBI has removed these guidelines until October 31, but this will only apply to new deposits booked during the permitted period. The benefit of this is proposed to be passed on to NRI customers through better interest rates.
What does it mean for NRIs to invest in DFs?
What this means for NRIs looking to invest in FDs during the four-month window is that the agreed rates locked in on new deposits will hold for the full term. Moreover, the interest earned on these deposits is tax exempt in India.
This is a great move to attract more currencies to India by offering higher interest rates on FCNR.
“It is a great move to attract more foreign currency to India by offering higher interest rates on FCNR which can be placed in US dollars or other foreign currencies,” said Dixit Jain, Managing Director of The Tax Experts DMCC, a Dubai-based company. tax consulting firm.
“The move comes amid massive pressure on the Indian rupee against the US dollar and declining foreign exchange reserves in the country.”
Beware of higher premature withdrawal rates
However, keep in mind that these deposits also carry a penalty of 0.25% to 1.0% for early withdrawal and no interest is paid if the deposits are withdrawn before one year.
Experts further recommend potential investors to calculate the returns of NRE deposits after taking into account the conversion loss and the change in the exchange rate.
This is why depositors are advised to also choose a solid regular commercial bank to park their funds, while adding that they should be aware that deposit insurance only covers accounts up to Rs 500,000 ( 22,954 Dh), which comes to around $6,300 or £5,300, which is not much.
Illustration on how to account for conversion loss and exchange rate variation
Let’s say that the exchange rate of Indian rupee to US dollar is currently 80. One NRI converts $10,000 (36,700 Dh) into Indian rupee at the above mentioned rate of Rs80, which is equivalent to Rs800,000.
If the NRE deposit you plan to invest in earns an interest rate of 5%, this amount increases to Rs 840,000 (Dhs 38,564). Further, consider also the devaluation of the rupee to 82 after one year. At the depreciated rate, Rs840,000 is now equal to $10,244, instead of $10,500 at the conversion rate of Rs80.
In other words, the NRI investor earns a return of 2.44% in dollars. This is beneficial to the depositor if, during the period the NRE deposit was made, the interest rate on a 1-year US dollar deposit rate is greater than 2.44%.
How has investing in FDs worked so far?
So far, most Indian banks have only offered fixed-rate FDs, and most advisers have recommended “laddering” to their clients to take advantage of high interest rates and liquidity. But what does this “staggering” mean?
For example, an investor with Rs. one year. The remaining amount of Rs200,000 (Dh9,183) would be kept in a longer term of two or three years FD.
“While smaller amounts of FD would be useful for sudden cash needs, larger deposits would be useful for obtaining higher interest rates. Usually when interest rates rise, banks raise rates immediately However, the same is not true for time deposits as banks are slow to offer higher rates,” said India-based banking analyst Shanu Thomas.
Key points to remember
The central bank’s recent move is aimed at attracting US dollars into the country to stem the current steep devaluation of the Indian rupee. Keep in mind that the RBI only removed these guidelines until October 31. NRI investors should therefore take advantage of this policy until then, experts strictly advise.
“For debt investors looking to build capital over a pre-determined period of time, fixed deposits (FDs) have always been a good option,” Thomas said.
“The above decision by the central bank should not only limit the current devaluation of the Indian currency, but also see foreign customers deposit more in the coming months, given that there has been a rise in recent weeks. “
Premature withdrawals from fixed deposits can occur in an emergency, so it is essential to be aware of the bank’s penalty charges
Although in addition to fixed rates of return, bank FDs have flexible terms ranging from 7 days to 10 years, potential investors are cautioned against the bank imposing a penalty rate on early liquidity which is deducted from the interest payment.
“Premature withdrawals from fixed deposits can happen in an emergency, so it is essential to be aware of the bank’s penalty charges and the specific period for which they apply in order to avoid paying them” , said Thomas.
In other words, penalty rates arise if an investor withdraws the term deposit account before it has reached maturity, but in the case of tax-saving FDs, one cannot perform premature withdrawals because it is the deposits that are subject to a blocking period.
These rates and fees vary from bank to bank, so be careful when approaching banks to find the best FD rates.